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For small business owners, tax filing can feel like an extra burden. But tax season also offers an opportunity to understand and take advantage of tax deductions that can help your company’s bottom line.
The IRS provides special tax write-offs for business owners, including for home office expenses, car expenses, and even some personal costs such as health insurance premiums. Here are 16 small business tax deductions, some well-known and others less so.
16 small business tax deductions
To help out our small business friends, we put together this list of some basic small business tax deductions the IRS offers to help reduce your tax bill. Remember, it’s always a good idea to consult a tax professional about how these deductions apply to your particular business activities.
Home office deduction
It all starts at home. If you’re using part of your home as an office space, you may be able to deduct those expenses.
This is true whether your residence is a home, condo, apartment, mobile home, or even a boat. It also includes structures on the property like an unattached garage, studio, and barn.
To qualify for this deduction, the IRS says business owners must meet the following qualifications:
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The space must be used exclusively and regularly for business purposes. In other words, if the space is also a guest room or a makeshift gym, it won’t qualify.
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The home must be the primary place of business. Someone can still qualify for this even if they conduct business outside the house, as long as the home is the primary place for administrative and management activities.
You’re limited to a certain number of square feet, and there are two different ways to claim it. Here’s a complete guide to claiming the home office deduction.
Office supplies
Of course you’ll have to purchase office supplies — and as long as they’re for business-use only, you can deduct those expenses. They may include items like printers, scanners, staplers, pens, and even office furniture.
In order for an expense to qualify, the IRS says it needs to be both ordinary and necessary. That’s defined as one that is “common and accepted in your industry.” A necessary expense is further defined as one “that is helpful and appropriate for your trade or business.”
You can only deduct these expenses within the year you purchased them.
Startup costs
Startup expenses are the costs associated with the research and investigation to start the business as well as the initial costs themselves.
Some examples of deductible expenses include market and product research, advertisements related to the business’ opening, employee training, travel related to securing clients and customers, consultant fees, and more.
Rent
Rental payments on your business property are deductible.
One note on this, though: To qualify, you must not own the real estate or have any type of conditional sales contract that would allow you to build equity in the property.
Software
Any types of software you purchase for business use, including subscriptions and leases, can be deducted on your tax return. Examples could be Microsoft Word, Quickbooks, Photoshop, social media software and so on.
The same standard applies for software as office supplies. The software must be “ordinary” and “necessary” within your industry.
Business meals
This one has changed in recent years. So if you’re not up to date, here’s the deal.
As of 2023, business entertainment expenses are no longer deductible. In the past, you could get a 50% deduction on business-related entertainment expenses such as concerts, sporting events, golf outings and more. But that ship has sailed.
The good news is many business-related food expenses are still deductible to differing degrees. Company-wide holiday parties, food included as taxable compensation to employees, and food and drinks provided free to the public are all 100% deductible.
Client dinners, meals at conferences or while traveling on business, food for a board meeting, and meals provided to employees working after hours are 50% deductible.
As always, keep those receipts.
Travel expenses
Like meal expenses, travel for the purpose of the business is deductible.
To qualify, you need to be traveling away from your central place of work for longer than one ordinary day’s work and you need to sleep to meet the work demands. The IRS says business travel can’t be lavish, extravagant, or for personal reasons.
Deductible examples include:
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Travel costs for airplanes, bus, train, or car
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Taxi or Uber fares
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Using a personal car for business
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Lodging
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Meals
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Laundry costs
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Tips
Travel to conventions and conferences is also deductible as long as they benefit the business itself.
Alarm systems
Security systems, including surveillance systems and burglar alarms, are considered ordinary and necessary business expenses and are deductible.
The IRS says these expenses shouldn’t be excessive or unreasonable, and you should be able to justify the expenses if needed. Also, if your home is your primary place of business, your home’s security system is a deductible business expense.
Business vehicle
If you have a vehicle you use for business only, the IRS allows you to deduct all of its related cost of ownership and operation. If you have a vehicle for both business and personal use, you can deduct only the business-related expenses.
You have two options when determining the deductible amount for your vehicle:
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Standard mileage rate: This is 65.5 cents per mile for tax year 2023.
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Actual expense method: You’ll need to determine the actual costs you incurred to operate the car for the portion that was business use only. The IRS says this includes “gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to the portion of the total miles driven that are business miles.”
You can do the math on both to figure out which option gives you a larger deduction.
Professional fees
Any professional services you pay for related to your business, such as legal fees or tax preparation by a CPA, are considered ordinary and necessary expenses and qualify as deductions.
The IRS does note that legal expenses you pay to acquire business assets usually are not deductible, however.
Employee salaries and contract labor
All of your payments to full-time and part-time W-2 employees are fully deductible, including commissions and bonuses.
You can also deduct payments to independent contractors and freelancers. Just make sure they are classified as such by filling out the 1099 form for any contractor who you paid more than $600 per year.
Business insurance
Any insurance expenses related to the ordinary operation of your business are also deductible. This includes property, liability, workers compensation, and even automobile insurance.
Self-employed business owners can also deduct the cost of health insurance for both the owner and their family.
Internet, phone, utilities
As with many other deductions, you can fully deduct the cost of your utilities — heating, electricity, water, phone, sewage, etc. — if your primary place of business isn’t your home. Otherwise, you can only deduct the portion you use for business.
If your main office is your home and you create a second phone line for business use only, that expense is fully deductible, as well as any internet expenses related to operating your business.
Bad debt
If you’ve loaned money to a client, vendor, or employee and never received it back, you can claim the “bad debt” deduction.
The IRS says you need to be able to prove it was a business loan, not personal, and not a gift. They add that “a debt is closely related to your trade or business if your primary motive for incurring the debt is business related.”
Examples include:
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Loans to clients, suppliers, distributors, and employees
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Credit sales to customers
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Business loan guarantees
Advertising and marketing
The IRS will allow you to take a tax deduction for bringing in new customers and keeping current ones through marketing and advertising. Again, the costs must be ordinary and necessary for your particular business.
Typical deductions may include reasonable advertising expenses related to the business, goodwill advertising as it relates to keeping the business name in front of the public, as well as providing meals, entertaining, or recreation to the public as a way to promote community goodwill.
Retirement contributions
As a small business owner, you can deduct your contributions to a retirement plan, as long as the plan is tax-qualified. This applies whether you are a sole proprietor, in a partnership, or a member of an LLC.
Being self-employed, rather than working for an employer with a 401(k) or pension plan, means you’ll need to do all the legwork yourself with the IRS to make sure your contributions are tax deductible.
How to file small business taxes
How you file your small business taxes depends entirely on how you classify your business. Here are the main options.
Sole proprietorship
With a sole proprietorship, the business itself isn’t taxed. Instead, the business owner reports the business’ profit and loss on their personal tax return.
In addition to filling out a typical 1040 personal tax return, the sole proprietor will file a Schedule C to report those profits or losses. If the business made more than $400 revenue as a sole proprietorship, the owner will also need to file a Schedule SE to report and pay Social Security and Medicare tax.
Read more: 7 ways to file your taxes for free
Partnership
Like sole proprietorships, partnerships are also taxed at the personal, not business level — a term the IRS calls “pass-through taxation” because the taxes pass through the business to the business owner.
Partnerships should use an information return, called a Form 1065, to report the annual profits, losses, deductions, and tax credits from operating the partnership. The individual partners should also file a Schedule K-1 to report their own individual profits and losses related to the business, along with their standard personal tax return.
Corporation
Unlike partnerships and sole proprietorships, corporations are required to pay taxes on their earnings, and their shareholders are also taxed when those earnings are paid as dividends.
Corporations use Form 1120 to report their income, gains, losses, deductions, credits, as well as to figure their income tax liability.